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Linn Energy, LLC (LINE) Message Board

  • legalbark legalbark Jan 24, 2014 11:06 AM Flag

    Effect of rising natural gas price on a fully hedged company like LINE

    Natural gas poked its head above $5 today. This should be good for natural gas providers like LINE. However, LINE is supposed to be 100% hedged which means they don't benefit from the rising spot price. In fact, I'm concerned they may have a serious "mark to market" problem on their balance sheet if that applies to the type hedge products LINE uses to hedge. Any input on this from anyone knowledgable in this subject would be appreciated. GLTA

    Sentiment: Buy

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    • NG price hedging is good in a dropping market, not so good in a rising market. The GOOD NEWS is that Line's liquids are NOT hedged and the liquids are a huge part of their production and will make the bottom line look really good as time goes by. Also future hedging will take into account the rising NG prices. So taken together, the outlook for LINE is very good. Cramer gave LINE a boost on his show last night.

      Sentiment: Strong Buy

    • Basically they buy puts, which protects their downside. They will have to mark to market as those puts plummet. It does not completely limit upside though -- it just reduces upside as those puts can only fall to zero at worst. Also, I believe they don't hedge NG liquids at all, so that upside will fall to the bottom line.

      • 2 Replies to whbog
      • whbog,

        They generally do not hedge NGLs as you mentioned so as prices go up they directly benefit, and that is probably somewhere around 16-20% of production....that is only my guess....since it was at 17% a couple of years ago before the BP acquisitions......which I did not know about until it was explained to me by Clay in IR, during an explanation about how their hedges work.

        You may also want to see the note #2 under that hedging slide (#27) in the most recent Linn presentation for how they hedged NGLs revenue for their Hugoton production.

      • They used to buy one-sided puts, they stopped that a few quarters back.

        I've seen some price sensitivity tables issued by other MLP's from time to time, and rising prices can actually hurt, pushing outside the range of the hedging. But, as pointed out, dry gas is not a big revenue component for LINE.

    • legalbark,
      .........the detail on the gas hedges are posted on SLIDE # 27 in the Jan. 14, 2014 presentation (the most recent Linn presentation),

      and notice the price for the gas puts...... for 2014, and the percentage of 41% of the hedges that are made of puts [which allow for added profit as prices go higher] while still protecting against adverse price declines.

      So it seems from your comment

      ", LINE is supposed to be 100% hedged which means they don't benefit from the rising spot price."

      that you do not understand exactly how Linn's hedges work and have assumed that being 100% hedged would cut of any added profit.....which is incorrect....

      This was also explained by the management and is posted in the presentation section and was also discussed by them in some detail.

    • outthink Jan 24, 2014 11:14 AM Flag

      LINE's output may be 100% of hedged at previously forecasted output levels but the former BRY's output is not 100% hedged. LINE could also exceed their forecasted output to take advantage of market conditions.

    • look at the price of ngl that is the leverage

31.08-0.16(-0.51%)Aug 21 4:00 PMEDT

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